Story Case

A transaction in which he was engaged required of Louis S. Easton that he make a large payment on the first day of July. For several months preceding, he was collecting the money for this purpose and depositing it in the Munger County Bank. Instead of taking a book credit, he received certificates of deposit for varying amounts, but in the following form:

"Munger County Bank. May 15, 1915. THIS IS TO CERTIFY that Louis S. Easton has deposited in this bank this day, five hundred and 00-100 dollars, payable to himself or the bearer, upon return of this certificate, with interest at four per cent, after one year from date. Munger City Bank, $500. By J. C. Dodds, Pres."

On the first day of July, he delivered to his creditor, Kobert Clifton, six of these certificates amounting to $4,000. During that month, Clifton presented the certificates to the bank with the demand for payment. The bank, however, told him that they would not be paid, as the bank had been advised that the certificates were really bank notes, which it had no authority to issue and which it could not, therefore, lawfully pay. Clifton brought suit upon the certificates of deposit, and the bank made the same defense. Is it valid, or can Clifton recover?

Ruling Court Case. Bank Of Martinez Vs. Hemme Orchard And Land Company, Volume 105 California Reports, Page 306

The Bank of Martinez was incorporated as a banking institution under the laws of the state of California. In the course of its business, it made a loan to the Memme Orchard and Land Company. The land company, in order to secure the loan, executed to the Bank of Martinez a mortgage upon certain property owned by the land company. The debt was not paid when due and the bank brought the present suit to foreclose the mortgage.

The Hemme Orchard and Land Company, by way of defense, contended that the mortgage was void. To support this contention, it cited that part of the Constitution of the state of California, Section 35, which provides that the legislature shall prohibit "any person, or persons, association, company, or corporation, from exercising the privileges of banking or creating paper to circulate as money."

Decision: Formerly, the issue by a bank of currency or bank notes was regarded as the primary function of the bank. To such an extent was this true that when the Constitution of California was adopted in 1849, it was thought that an institution which did not issue bank notes was not a banking institution. Thus, when it was declared in the California Constitution that the legislature should not create a banking institution, it meant only that it should not create an organization which should have the power to issue bank notes. It was not intended to prohibit the creation of institutions which should receive deposits and make loans. In fact, in a previous Section (34), express provisions were made for such an organization. Consequently, this mortgage and loan were not valid, and the bank is entitled to a lien of foreclosure.

In discussing the point it was said by the court: "The provisions of the Constitution of 1849 must be viewed in the light of 1849. The framers of that instrument had a vivid realization of the evils of bank bills issued by private corporations to circulate as money. Practically, they had never known any other money than bank bills until they came to California. The inconvenience arising from such currency was always very great, but the framers of the Constitution of 1849 had known of the utter prostration of business which resulted from the panic of 1837, when every bank in the United States suspended. As this constituted the entire currency of the country, the calamity can better be appreciated than described. The people of California were elated by the possession of rich gold placers, and probably believed that no other currency than gold and silver would be required. The reiteration of the idea shows that they desired above all things to prohibit the circulation of bank bills. This is what they meant by 'banking,' for while prohibiting this they authorized the formation of associations for the deposit of gold and silver, which, however, shall not put in circulation paper 'of any bank' to circulate as money. Judgment was given for the Bank of Martinez.

Ruling Law. Story Case Answer

A function frequently performed by a banking institution is that of issuing notes which are designed to pass as money, or as a substitute for money. They represent a circulating obligation of the bank to pay the amount of the note to any holder. The characteristic of a bank note is that it is designed for general circulation. Banks are constantly issuing drafts, cashiers' checks, certified checks of depositors, and similar instruments, which represent an obligation of the bank just as does a bank note, and which, like a bank note, are used in making payments. But these are all temporary and short-lived obligations, which are limited in their circulation and normally return in a few days to the issuing bank. A bank note is a permanent instrument, with no time of maturity, payable to the bearer, and usually circulating for a long time without ever coming back to the bank, unless it is worn out. It does not bear interest nor require indorsement. Formerly, the state banks issued bank notes in great number, but the United States imposed such a high tax upon them that they were forced out of existence. Now, only national banks issue such notes. It is the purpose, and soon will be the effect, of the new Federal Eeserve Bank system, to supplant the national bank notes with the notes of the Federal Reserve Banks. When that is accomplished, there will be no bank notes in this country issued by purely private, as distinguished from governmental, banks.

The certificate of deposit, in the Story Case, is a type of instrument of very wide use. It furnished to the depositor a receipt for his deposit which may be transferred in payments, in a way in which a pass book cannot be used. It will be accepted by creditors in reliance on the liability of the bank, whereas, a check has only the liability of the drawer, until certified. These advantages are often very desirable. The certificate of deposit has been held by the courts to be in law nothing more than a promissory note of the bank, but it is not a bank note, in the general sense. The one in the Story Case is payable to the bearer, as is a bank note, but more often a certificate of deposit requires the indorsement of the payee. They usually bear interest, either from date or after a certain period, and are often payable at a fixed future time. These things are not true of bank notes. But the most significant as well as the most obvious distinction is that they are, like all the other temporary obligations of the bank, filled in upon blank printed forms to meet the particular case, while bank notes are issued in large numbers in a regular engraved or lithographed form, with denominations in a fixed series. They are designed to be quickly recognized as money and not easily counterfeited, and are put upon paper selected to withstand the wear of circulation. The non-circu-lating obligations usually show upon their face that they depend for their validity upon the signatures of the bank officials and that they are designed for early payment and cancellation.

The judgment of the court, in the Story Case, is not, therefore, open to much doubt. The promissory note of a bank is not a bank note, within the prohibitory and taxing statutes, and it is the normal function of every bank to issue its obligations. It is, therefore, liable upon these certificates of deposit, and judgment will be given for Clifton.